Economist Phelps: US Is 'Out of Ammunition' to Fight Stagnation

While some experts see signs that the economy is improving, Nobel laureate economist Edmund Phelps of Columbia University isn't quite so optimistic.

"It's surprising when people suddenly are talking about stagnation when we've been in stagnation since 1972," he tells CNBC.

"Governments have thrown all sorts of ammunition at it including concocting the housing boom. We are kind of out of that ammunition, and we have to dig deeper if we are going to get out of this rut," Phelps notes.
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The economy averaged 2.6 percent growth over the first three quarters of last year, and many economists predict GDP will grow about 3 percent this year, but Phelps believes that's "a little on the optimistic side."

He says a dearth of innovation is holding back business investment.

"The reason business investment is weak is that investment has run into diminishing returns," Phelps explains. "In the good old days we had innovation always creating new investment opportunities. So we were always countering diminishing returns."

What's needed is a change in attitude, he argues. "We have to get back with the program, with the idea that life can be fun and challenging and riveting and thrilling," he said. "We need to open up the gates for innovation again. That means attacking vested interests. Stop protecting all these enclaves of special interests."

Meanwhile, Kiplinger forecasts that economic growth will average 2.6 to 2.7 percent for 2014, with the second half of the year stronger than the first.

"The gains will come as business and consumer confidence strengthens and Europe begins to emerge from its 18-month recession, brightening overseas sales prospects," Kiplinger says. "Growth will remain restrained by continued government deficit reduction, however."